Addition based on observation by DCIT without independent inquiry by AO not sustained

Ankita Aggarwal Vs ITO (ITAT Delhi)

ITAT Delhi held that addition towards undisclosed investment in shares and unsecured loans merely based on observation made by DCIT without independent inquiry by AO is unjustified and hence the addition is liable to be deleted.

Facts- In course of assessment proceedings, AO made inquiries with regard to the investments made by the assessee in shares of M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd. AO ultimately concluded that the investments in shares of M/s. Vidya Shankar Investments Pvt. Ltd. as well as the unsecured loans received from M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Ltd. are non-genuine, hence, have to be treated as unexplained investment under section 69B of the Act and unexplained cash credit under section 68 of the Act respectively. Accordingly, he added back the investments in shares amounting to Rs.1,84,17,025/- in M/s. Vidya Shankar Investments Pvt. Ltd. and unsecured loans availed of Rs.47,89,760/-. However, he accepted the investment in shares of M/s. Index Securities & Research Pvt. Ltd. as genuine. The first appellate authority confirmed the additions. Being aggrieved, the present appeal is filed.

In course of search and seizure operation in residential premises of Sant Lal Aggarwal, jewellery of the value of Rs.78,77,328/- was found in the name of Smt. Rajni Aggarwal, Smt. Ankita Aggarwal and Smt. Khushboo Aggarwal. AO divided the jewellery amounting to Rs.78,77,328/- amongst three ladies and apportioned an amount of Rs.26,25,776/- as assessee’s share and added back to her income.

Conclusion- Held that AO has treated the transactions between the assessee and M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd. as non-genuine, merely, relying upon the observations made by the DCIT, Central Circle in the communications sent to the Assessing Officer. No independent inquiry at all has been made by the Assessing Officer to verify the genuineness of the transactions. Thus, in our view, the additions made purely on conjecture and surmises cannot survive. Accordingly, we direct the Assessing Officer to delete the additions of Rs.1,84,17,025/- representing undisclosed investments in shares and Rs.47,89,760/- representing unsecured loans.

Held that when the jewellery was found in a residential premise cohabited by various family members, it is not understood how the Assessing Officer can apportion the jewellery in equal proportion without identifying the person to whom the jewellery in reality belongs. Moreso, when two of the ladies have come forward to claim that the assessee owned jewellery worth Rs. 9,50,000/- only. Without establishing on record that the jewellery found is equally owned by all the three ladies, addition could not have been made on estimate basis. Thus, keeping in view the factual matrix, we are inclined to hold that the addition made is unsustainable.

FULL TEXT OF THE ORDER OF ITAT DELHI

This is an appeal by the assessee against order dated 26.03.2019 of learned Commissioner of Income Tax (Appeals)-16, New Delhi, for the assessment year 2010-11.

2. The assessee has raised multiple grounds in the memorandum of appeal, both on legal issues as well as on merits. In addition, the assessee has raised some legal issues challenging the validity of the proceedings initiated under section 147 of the Act as well as the assessment order passed in consequence thereof by way of additional grounds through letters dated 13.10.2023 and 04.06.2024.

3. At the outset, learned counsel appearing for the assessee, on instructions, submitted that the additional ground raised in letter dated 13.10.2023 is not to be pressed. Accordingly, the said ground is dismissed as not pressed.

4. Insofar as the other grounds are concerned, though, we have
heard the parties both on the legal issues as well as on the issue arising on merits, at the outset; we propose to deal with the issues on merits. So far as the merits of the issues are concerned, the assessee basically has contested the following three additions:

5. Insofar as additions mentioned at items nos. i and ii are concerned, briefly the facts are, the assessee is a resident individual. For the assessment year under disputed, the assessee filed her return of income on 28.03.2011. Subsequently, the Assessing Officer received certain communications from the Deputy Commissioner of Income Tax, Central Circle, intimating that in course of search and seizure operation carried out on 14.09.2010 on different persons/entities related to Jagat Group, it was found that through two paper companies, viz., M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Ltd. accommodation entries, by way of share transaction and unsecured loan, were provided to various beneficiaries. Based on such information, the Assessing Officer reopened the assessment under section 147 of the Act. In response to notice issued under section 148 of the Act, the assessee filed her compliance and also objected to the initiation of proceedings under section 147 of the Act.

6. After disposing of the objections of the assessee, the Assessing Officer proceeded with the assessment. In course of assessment proceedings, the Assessing Officer made inquiries with regard to the investments made by the assessee in shares of M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd. He further inquired into the unsecured loans availed by the assessee from the aforesaid two entities. The Assessing Officer also called upon the assessee to explain the genuineness of investments in shares as well as loan transactions. In response to the queries raised by the Assessing Officer, the assessee furnished various documentary evidences to establish the genuineness of the investments made in shares as well as the unsecured loans availed during the year. The Assessing Officer, however, was not convinced with the submissions made by the assessee. Referring to the information contained in the communication received from DCIT, Central Circle, the Assessing Officer concluded that M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd. are two paper companies held/managed by entry operators, who have association with the people related to family of the assessee. He further observed that these two entities were used as a front to channelize unaccounted money. Basis the aforesaid reasoning, the Assessing Officer ultimately concluded that the investments in shares of M/s. Vidya Shankar Investments Pvt. Ltd. as well as the unsecured loans received from M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Ltd. are non-genuine, hence, have to be treated as unexplained investment under section 69B of the Act and unexplained cash credit under section 68 of the Act respectively. Accordingly, he added back the investments in shares amounting to Rs.1,84,17,025/- in M/s. Vidya Shankar Investments Pvt. Ltd. and unsecured loans availed of Rs.47,89,760/-. However, he accepted the investment in shares of M/s. Index Securities & Research Pvt. Ltd. as genuine. Though, the assessee contested the aforesaid additions before learned first appellate authority, however, they were confirmed.

7. Before us, learned counsel appearing for the assessee submitted that in course of assessment proceedings, the assessee had furnished cogent documentary evidences to prove the investments in the shares as well as the unsecured loans availed during the year. He submitted, not only the confirmations from the parties were filed, but various other documentary evidences, such as, Memorandum of Association of both the companies, copies of bank statements, copies of documents filed by the concerned companies before the Ministry of Corporate Affairs, etc. were filed before the Assessing Officer. However, he submitted, without properly verifying the documentary evidences, the Assessing Officer had made the additions merely relying upon the information received form DCIT, Central Circle.

8. He submitted, even the Assessing Officer did not have in his possession the so called seized documents referred to in the letters received from DCIT, Central Circle. He submitted, without having the requisite documents in his possession, the Assessing Officer has merely proceeded on the basis of communications received from the DCIT, Central Circle, to conclude that M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd. are paper companies providing accommodation entries.

9. He submitted, assessment in case of Vidya Shankar Investments Pvt. Ltd. for the very same assessment year was completed under section 143(3) read with section 153C of the Act, accepting the returned income without expressing any doubt with regard to the genuineness of the company. He submitted, even in case of Index Securities & Research Pvt. Ltd., though, assessment was completed under section 143(3) read with section 153C of the Act, making huge addition by treating it as accommodation entry provider, however, the additions were, ultimately, deleted by the first appellate authority and the decision of the first appellate authority was upheld by the Tribunal and Hon’ble Jurisdictional High Court. He submitted, the decision of the Assessing Officer in treating M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Ltd. as paper companies providing accommodation entries, was reversed by the first appellate authority and Tribunal, even in earlier assessment years, viz., 2007-08, 2008-09 and 2009-10. He submitted, the decision of the Tribunal in these assessment years were also upheld by the Hon’ble Jurisdictional High Court in case of both the companies.

10. Thus, he submitted, the allegation of the departmental authorities that M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd. are paper companies providing accommodation entries, is contrary to the materials on record, as, their genuineness stand established by virtue of orders passed not only by the Tribunal, but even by the Hon’ble Jurisdictional High Court. He submitted, none of the documentary evidences furnished by the assessee to prove the genuineness of the investments in shares and loan transactions, have been commented upon by the departmental authorities or anything adverse has been noted by them. Thus, he submitted, when the assessee has proved the genuineness of transactions through proper documentary evidences, the additions made are purely on conjectures and surmises have to be deleted.

11. Learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned first appellate authority.

12. We have considered rival submissions and perused the materials on record. We have also applied our mind to the decisions relied upon by learned counsel for the assessee. As discussed earlier, the assessee has contested the additions relating to investment in shares of a company, named, Vidya Shankar Investments Pvt. Ltd. as well as unsecured loans availed from the M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Ltd. Observations of the Assessing Officer in the assessment order qua the additions made clearly indicate that his conclusion regarding the additions are primarily based on the information received from DCIT, Central Circle, through certain communications. Though, in the said communications, the concerned authority has stated that in course of search and seizure operation conducted in case of Jagat Group, certain incriminating materials were found indicating that M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd. are paper companies providing accommodation entries. However, the nature of the incriminating material has neither been discussed in detail, nor it is forthcoming In fact, in the assessment order, the Assessing Officer, except referring to the communications/letters from DCIT, Central Circle, has not discussed anything about the incriminating materials referred to in the said communications. It is quite clear from the observations of the Assessing Officer that he has treated M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Ltd. as paper companies/entities providing accommodation entries, mainly adopting the opinion expressed by DCIT, Central Circle in the communications sent to the Assessing Officer. Interestingly, though, the assessee had invested in shares of M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd., however, the Assessing Officer has accepted the investments made in M/s Index Securities & Research Pvt. Ltd.

13. Surprisingly, while deciding the issue, learned first appellate authority has completely mixed up the facts and has concluded that the investments in shares of Index Securities & Research Pvt. Ltd. are non-genuine. Whereas, the issue relating to investment of shares in M/s. Index Securities & Research Pvt. Ltd. is not at all a subject matter of dispute before the first appellate authority, as, the Assessing Officer has not made any addition with regard to such investment.

15. Be that as it may, the issue which requires consideration is, whether the investments made in the shares of M/s. Vidya Shankar Investments Pvt. Ltd. as well as unsecured loans from M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd., are genuine or not. The Assessing Officer has questioned the genuineness of the aforesaid transactions primarily on the ground that both the aforesaid entities are paper companies providing accommodation entries. The acceptability of the aforesaid conclusion drawn by the Assessing Officer needs to be examined in the context of facts and materials brought on record.

16. As could be seen from materials on record, for the very same assessment year, proceedings under section 153C of the Act were initiated against both the entities. In the assessment order passed under section 143(3) read with section 153C of the Act on 28.03.2013, a copy of which is placed at page 134 of the paper book, it is observed that the Assessing Officer, while completing the assessment, has accepted the income computed by the assessee in the return of income and no adverse inference has been drawn. Similarly, in case of M/s. Index Securities & Research Pvt. Ltd., though, in the assessment completed under section 143(3) read with section 153C of the Act vide order dated 28.03.2013, the Assessing Officer has made addition of more than Rs. 50 crores, however, learned first appellate authority, while deciding the appeal filed by the concerned entity, deleted the addition.

17. The Revenue being aggrieved with the decision of learned first appellate authority preferred an appeal before the Tribunal. While deciding the appeal, the Tribunal in order dated 26.08.2016 passed in ITA No. 430 to 432/Del/2014 upheld the decision of learned first appellate authority. It is noteworthy, the aforesaid decision of the Tribunal was challenged by the Revenue before the Hon’ble Jurisdictional High Court. However, in order dated 04.09.2017 passed in ITA No. 566/2017 and Ors., Hon’ble Jurisdiction High Court dismissed the appeals of the Revenue. It is further relevant to observe, in case of M/s. Vidya Shankar Investments Pvt. Ltd., relying upon the information gathered in course of search and seizure operation conducted in case of Jagat Group, assessments were completed in assessment years 2007­08, 2008-09 and 2009-10 making huge additions towards unexplained cash credit under section 68 of the Act by treating the share application money and share premium as bogus. While deciding the appeals of the assessee, learned first appellate authority deleted the additions. Being aggrieved, Revenue came in appeal before the Tribunal. While deciding the appeals of the Revenue, the Tribunal in ITA No.6569/Del/2013 and Ors., dated 28.09.2016 examined the issue in great detail and recorded the following findings:

“17. AO also proceeded on the premise that it is beyond comprehension to believe that a share having face value of Rs.10. has been sold for Rs.3.50 per share but has not preferred to bring on record any material that the aforesaid invoices are concerned/ connected with the assessee company. Moreover, its accounts are not in dispute, because from the return filed by the assessee on 23.03.2009 qua AY 2008-09 and return filed by assessee on 04.09.2007 qua 2007-08, treated u/s 153C, it is clear that share capital amounting to Rs.77,50,000/- and share premium of Rs.6,97,50,000/- for AY 2007-08, share capital amounting to Rs.47,90,000/- and share premium of Rs.4,30.31,800/- for AY 2008-09 and Rs.97,40,000/- and share premium of Rs.8,75,97,500/- for AY 2009-10 tallied with Documents-II having been declared by the assessee even prior to the search and seizure operation.

18. Even otherwise, AO has not conducted investigation/inquiry regarding the transactions in question on the basis of which addition has been made nor the documents relied upon have ever been put to the assessee nor the same have even figured in the satisfaction note.

19. Now, the next question arises for determination in this case is:-

“as to whether the CIT (A) has erred in facts and law-in deleting the addition of Rs. 4,78,21,800/- qua AY 2007-08, Rs.7,75,00,000/- qua AY 2008-09 and Rs.9,73,37,500/- qua AY 2009-10, by treating the bogus share application money/share premium as unexplained cash credit?”

20 Undisputedly, the assessee company has supplied confirmation letter from the share applicants; copies of bank accounts of a day or week of the share applicants; copy of acknowledgement of ITRs and copy of balance sheets etc. for scrutiny by the AO, which the AO has declared ingenuine on the basis of conjectures and surmises inter alia that these documents do not prove the capacity of these persons to give the share capital/ share premium for investment; that these companies appear to be not doing any business and drawing such income to justify their investment, and that most of the investors sold their shares to the person connected or controlled by Shri Sant Lal Agrawal and Shri Satish Kumar Pawa at the price of 1/4th of the face value of the share.

21. When undisputedly AO has perused the relevant details pertaining to the share capital/share premium qua the year under assessments as furnished by the assessee company and has not minced a word to question the validity of those documents nor the AO has given any findings regarding the summons issued u/s 131 of the Act for personal deposition and furnishing of details by the investors in the assessee company. Even no statement of these investors was recorded by the AO.

22. So, when all the shareholders appear before the AO and filed confirmations, bank statements, copy of ITRs for the AY 2007-08 to 2011-12, copy of PAN, name of directors, copy of audited accounts, etc. to establish the investment made by them in the assessee’s company, their identity cannot be questioned on the basis of conjectures and surmises. In the absence of any adverse material on record that cash receipt/deposits were noticed in the bank accounts of these companies in question, the capacity of these investors cannot be questioned. Moreover, the assessee company has received the subscription of these shareholders through banking transactions.

23. So, the assessee company has duly discharged its onus to prove the identity, creditworthiness and genuineness of the share applicants who have subscribed to the shares during the years under assessment, u/s 68 of the Act, the assessee company cannot be faulted merely on the basis of conjectures and surmises particularly in the absence of any cogent material.”

18. The aforesaid decision of the Coordinate Bench has been confirmed by the Hon’ble Jurisdictional High Court. Thus, as could be seen from the facts discussed above, the genuineness of both the entities, viz., M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd. was tested not only before the departmental authorities, but before the Tribunal and Hon’ble Jurisdictional High Court as well. However, the allegation of the Assessing Officer regarding the genuineness of the aforesaid two entities could not be established. In fact, the Coordinate Bench, while deciding the appeal of Vidya Shankar Investments Pvt. Ltd. has given a categorical finding that the concerned entity was able to prove the genuineness of the share application money and share premium received from various persons.

19. Thus, viewed in the context of the observations of the Coordinate Bench and Hon’ble Jurisdiction High Court, as well as, the observations of learned first appellate authority, while deciding the appeals of the aforesaid two entities, it cannot be said that they are paper companies providing accommodation entries only.

20. It is a fact on record that in course of assessment proceedings, the assessee had furnished all documentary evidences, including confirmations from the concerned parties to prove the genuineness of the transactions relating to both the investments in shares and availing of unsecured loans. The Assessing Officer has not taken care to analyze and inquire into the evidences furnished by the assessee. No effort has been made by the Assessing Officer to disprove and discredit them. Without making any inquiry on his own or even establishing on record that evidences furnished by the assessee are not valid, the Assessing Officer could not have proceeded to treat the investments in shares and unsecured loans availed as non-genuine. It is prima facie evident, the Assessing Officer has treated the transactions between the assessee and M/s. Vidya Shankar Investments Pvt. Ltd. and M/s. Index Securities & Research Pvt. Ltd. as non-genuine, merely, relying upon the observations made by the DCIT, Central Circle in the communications sent to the Assessing Officer. No independent inquiry at all has been made by the Assessing Officer to verify the genuineness of the transactions. Thus, in our view, the additions made purely on conjecture and surmises cannot survive. Accordingly, we direct the Assessing Officer to delete the additions of Rs.1,84,17,025/- representing undisclosed investments in shares and Rs.47,89,760/- representing unsecured loans.

21. The next item of addition is on account of undisclosed investment in jewellery.

22. Briefly the facts are, in course of search and seizure operation in residential premises of Sant Lal Aggarwal, jewellery of the value of Rs.78,77,328/- was found in the name of Smt. Rajni Aggarwal, Smt. Ankita Aggarwal and Smt. Khushboo Aggarwal. Before the Assessing Officer, the sworn affidavits of the assessee and Smt. Rajni Aggarwal stating that jewellery valuing of Rs.9,50,000/- belongs to assessee were furnished. Whereas, it was stated, the rest of the jewellery belongs to other family members. Alleging that no documentary evidences were furnished by the assessee to prove such claim and the affidavit was not notarized, the Assessing Officer divided the jewellery amounting to Rs.78,77,328/- amongst three ladies and apportioned an amount of Rs.26,25,776/- as assessee’s share and added back to her income. Before learned first appellate authority, the assessee reiterated the stand taken before the Assessing Officer. However, learned first appellate authority did not record any finding on the issue.

23. Before us, learned counsel appearing for the assessee submitted that jewellery of Rs.9,50,000/- belongs to the assessee and remaining jewellery belongs to other family members. He submitted, since the jewellery found is within the permissible limits prescribed by Central Board of Direct Taxes (CBDT), no addition should have been made.

24. Learned Departmental Representative submitted, since the assessee has not raised any specific ground before the first appellate authority challenging the addition, she cannot raise it now.

25. We have considered rival submissions and perused the materials on record. It is a fact that in course of search and seizure operation carried out in the residential premises, jewellery worth of Rs.78,77,328/- was alleged to have been found in the names of Smt. Rajni Aggarwal, Smt. Ankita Aggarwal and Smt. Khushboo Aggarwal. It is further evident, the Assessing Officer has distributed the value of jewellery equally amongst the three ladies and made addition of Rs.26,25,776/- at the hands of the assessee. There is nothing on record to suggest that the jewellery was found from the possession of the assessee. It is a fact on record that affidavits have been filed by the assessee and Smt. Rajni Aggarwal stating that the jewellery valued at Rs.9,50,000/-belongs to the assessee and remaining jewellery belongs to other family members. When the jewellery was found in a residential premise cohabited by various family members, it is not understood how the Assessing Officer can apportion the jewellery in equal proportion without identifying the person to whom the jewellery in reality belongs. Moreso, when two of the ladies have come forward to claim that the assessee owned jewellery worth Rs. 9,50,000/- only. Without establishing on record that the jewellery found is equally owned by all the three ladies, addition could not have been made on estimate basis. Thus, keeping in view the factual matrix, we are inclined to hold that the addition made is unsustainable.

26. So far as the contention of learned Departmental Representative that this ground cannot be entertained, as it was not raised before the first appellate authority, we are of the view that the assessee did raise the issue before learned first appellate authority in her submissions. Hence, the contention of learned Departmental Representative cannot be accepted. The Assessing Officer is directed to delete the addition.

27. In view of our decision on merits, as recorded above, we are not inclined to dwell upon the various legal issues raised in the main grounds as well as in additional grounds, as they are of academic interest.

28. In the result, appeal is allowed, as indicated above.

Order pronounced in the open court on 6t^h August, 2024